Bank Recapitalisation Should Be Done Using Cash, Not Bonds: Former RBI Governor Rangarajan

The recapitalisation of public sector banks should be done using cash and not bonds, former Reserve Bank of India Governor C Rangarajan said Friday, even as he maintained that boards of state-run firms, including banks, should maintain an “arm’s length” from the government.

Finance Minister Nirmala Sitharaman had in August announced infusion of Rs 70,000 crore for bank recapitalisation—a move aimed at boosting lending and addressing India’s liquidity crisis.

At the inaugural session of the seminar Non-Performing Assets and its Resolution in Indian Banks at ICFAI Foundation for Higher Education, Rangarajan said the centre has infused Rs 2 lakh crore into various banks in the past three years, and it would be difficult for any dispensation to pump in so much as capital in cash form.

"I also have a point that one of the answers to the problems faced by the banking system is to ensure that the capitalisation of the banks is done properly,” he said.

According to the former central banker, the current bank recapitalisation is being done using issue bonds. “What the banks really gain is only the interest income through the bonds. This also needs a relook. I plead guilty because we initiated this in the early 1990s. But that was a different situation."

“The fiscal was undergoing a great deal of problems as part of the reforms (then). But should we continue with this system?" he said.

Rangajran said it is necessary to ensure that the state-run lenders run their business in the national interest and it is not necessary for the government to interfere with the commercial decisions of banks. “There is still much that needs to be done in terms of appropriate mechanism for appointing the boards, for appointing the chief executives of the banks.”

Later, while interacting with the media, he said though there is a decline in the country's growth numbers, the situation does not amount to "recession". "There is a slowdown. There is no doubt about the fact that there is slowdown, but the slowdown is in growth rate," Rangarajan said.

He believes it would take another eight years for India to become a $5 trillion economy as opposed to Prime Minister Narendra Modi's target of 2025, due to muted growth now. "Growth may pick up next year. Growth may not be substantial, but it may pick up next year...it takes 2-3 years to get back the growth of higher than 7 percent," he said.